Brett Arends Says Investors Can Successfully Time the Market
In an article posted at Marketwatch, financial writer Brett Arends makes the case for market timing. Noting that simply looking at a chart of the stock market indexes over the past couple of decades makes it difficult to accept that stock prices follow a random walk, Arends speculates on the reason behind this misconception.
According to conventional wisdom, any attempt to time the market is fundamentally flawed. Stock markets follow a ‘random walk’, they say. No one can predict the market’s next move, so trying to do so will end up costing you money. A lot of your long-term gains will come from a few big “up” days, and these are completely unpredictable — if you are out of the market when they happen you will miss out on a lot of profits.
Money managers often push this idea to the clients. It has, from their point of view, a side benefit: It helps keeps the clients fully invested at all times, which means their assets are generating more fees.
But is the idea correct?
The simple answer: No.
Arends points out that there are much better times to invest than others and provides “three measures which have a strong track record of predicting whether this is a good time to make long-term investments in U.S. stocks.”
According to Arends:
Those three measures are the Cyclically-Adjusted Price-to-Earnings Ratio, or CAPE; the Cyclically-Adjusted Book-to-Market ratio; and the “q” ratio. Two of these measures — the CAPE and the q — are readily accessible to the public.
Arends proceeds to discuss each of the measures of valuation in more depth and what they portend for future returns at the source link below.